Thursday, June 10, 2010

Oman’s combination of a growing, affluent population and a modern, open economy offers an abundance of business opportunities and attracts companies from around the world keen to take advantage of those opportunities.

For any foreign company looking to enter the Omani market, one of the first steps is to consider which business structure to use. Under Omani law, it is mandatory for any company doing business in the Sultanate to have a “legal presence” in Oman. Foreign companies must form and register an Omani legal entity that can do business in the Sultanate. There are three options available for foreign companies to establish a legal presence: (i) form an Omani company with a local partner; (ii) engage a local agent; or (iii) establish a branch in Oman.

Choosing the business structure most appropriate for the foreign company’s needs is often one of the keys to doing business in Oman successfully. This article provides an overview of the three options, including some of the important features of each. Option One: Form an Omani Company with a Local PartnerThere are two kinds of Omani companies that a foreign company may form with its local partner: a limited liability company (LLC) or a joint-stock company. Although joint-stock companies are required by law for some fields of business (e.g., insurance or investment companies), most foreign companies seeking to do business in Oman choose to form an LLC, as there are far fewer procedural, disclosure and corporate governance requirements for LLCs than for joint-stock companies.

The main advantages of an LLC are that it may continue to exist indefinitely, it may service both private and government clients, and it limits the foreign parent company’s liability to the amount of its capital contribution.

Among the requirements for forming an LLC are a capital contribution of 150,000 Omani Rials and a minimum of 30 percent shareholding by the Omani partner, although the allocation of the capital contribution and the distribution of profits may be however the shareholders agree, and need not correspond to shareholding percentages. LLC taxable income over 30,000 Omani Rials is taxed at a rate of 12 percent.

Option Two: Engage a Local AgentForeign companies typically enter into an agency agreement with a local Omani agent for purposes of selling and distributing their products in Oman. Under an agency relationship, all business done in Oman must be performed by the local agent; the foreign company principal may not, for example, sell its products directly in Oman. (We note that in special cases, such as defense-related products, foreign companies may sell directly in Oman without an agent, and indeed may be encouraged or required by the buyer not to use an agent.) Income derived from agency arrangements is taxed at a rate of 12 percent.

Engaging a local agent is a quick and simple process: all that is required is a signed agency agreement between the parties, which is almost always registered by the agent with the Omani Ministry of Commerce and Industry. However, it is important to bear in mind that terminating an agency relationship is significantly more difficult than forming one, as Omani courts tend to be highly protective of local agents and may award terminated agents generous compensatory damages. Foreign companies considering entering into an agency agreement therefore should be prudent in selecting a local agent, and should consult with a legal advisor to ensure that the agency agreement adequately protects the company’s interests.

Option Three: Establish a Branch in OmanForeign companies performing a contract for the government may establish a legal presence by opening a branch in Oman. The main advantages of a branch are that there are no minimum capital requirements, administrative burdens are minimal, and branches can be 100 percent owned by the foreign company. The drawbacks to branches include their limited lifespan (they exist only as long as the government contracts they were formed to service; although their life can be extended if the foreign company wins a new government contract prior to the expiration of the contract under which the branch was formed), their narrower scope (branches may not service private-sector clients) and the fact that under Omani law branches are considered extensions of the foreign parent company for liability purposes.

Forming a branch is typically the preferred way for foreign companies servicing a government contract to establish a legal presence in Oman, largely because the ability to own the branch 100 percent allows the foreign company to maintain sole control over the entity that receives payments under the contract. The procedural requirements for forming a branch are less than for forming an LLC, but greater than for entering into an agency agreement. Taxable income derived from branches is taxed at a rate of 12 percent.

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